Key Tronic Corporation

Good day and welcome to the fourth quarter and year-end fiscal 2022 Keytronic Corporation Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Larson. Please go ahead, sir.

Good afternoon, everyone. I am Brett Larson, Chief Financial Officer of Keytronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here in the Spokane Valley headquarters is Craig Gates, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events of the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K Quarterly 10 Qs and 8 Ks. Please note on this call we will discuss historical, financial, and other statistical information regarding our business and operations. Some of this information is included in today's press release, and a recorded version of this call will be available on our website. Today we released our results for the quarter end, year ended, July 2nd, 2022. For the fourth quarter of fiscal year 2022, we reported total revenue of $126.2 million compared to $132.6 million in the same period of fiscal year 2021. For the full fiscal year of 2022, total revenue was $531.8 million, up 3% from $518.7 million for the fiscal year of 2021. During fiscal year 2022, we added significant new programs and our backlog for orders reached historic highs. However, constraints in the global supply chain and transportation issues limited production throughout the year. During the fourth quarter of fiscal year 2022, the results were impacted by intermittent parts supply and factory downtime. Our facilities in Shanghai, China were closed for most of the fourth quarter. due to a government-mandated COVID shutdown. While the reopening of our China facility took longer than anticipated, operations have since resumed. Also impacting the results of the fourth quarter were legal costs related specifically to the SEC's review of last year's whistleblower complaint. These totaled 8 cents per diluted share during the quarter, though we estimate legal costs to decrease in coming periods. For the fourth quarter of fiscal year 2022, our gross margin was 9.3%. An operating margin was 1.8% compared to a gross margin of 7.8% and an operating margin of 1.1% in the same period of fiscal year 2021. The increased margins primarily reflect an increase in sales pricing to recoup higher material and labor costs that we incurred throughout the fiscal year. While the fourth quarter was a significant improvement of gross margin, we expect margins to return to historical levels in coming quarters. For the fourth quarter of fiscal year 2022, net income was $1 million, or 9 cents per share, up from $0.2 million, or 2 cents per share, for the same period of fiscal year 2021. For the full year of fiscal year 2022, net income was $3.4 million, or 31 cents per share, compared to $4.3 million, or 39 cents per share, for fiscal year 2021. The year-over-year change is predominantly a result of increased legal expenses and higher interest expense. Turning to the balance sheet, we continue to maintain a strong financial position. Despite supply chain and COVID-related production delays throughout fiscal year 2022, and the continued rampant transfer of new programs, we managed to end the year with total working capital of $176.3 million in a current ratio of 2 to 1. For our year, our inventory increased by $18.4 million, or roughly 13%. We are carefully balancing customer demand and the likelihood of successfully bringing in parts in time for planned production. The state of the worldwide supply chain now requires that we look out much further in the future than in historical periods. In future quarters, we expect to see our net inventory turns slowly improve to more historical levels. At the end of the year, trade receivables were up by about $25.6 million from the end of the prior year, and our DSOs also increased to about 88 days, up from 76 days which reflects timing of shipments to customers with extended terms and some delays in payments from customers who were impacted by pandemic-related slowdowns and restarts in their respective markets. Total capital expenditures were about $6.8 million for fiscal year 2022, down from $10.6 million in the prior year. We are keeping a careful eye on capital expenditures However, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilizing leasing facilities, as well as make efficiency improvements to prepare for growth and add capacity. Despite significant customer backlog, we expect that the ongoing disruptions from the global supply chain will continue to significantly limit production and adversely impact operating efficiencies. For the first quarter of fiscal year 2023, we expect to report revenues of approximately $125 million to $135 million and earnings of approximately 5 to 10 cents per diluted share. We're working closely with our customers, key suppliers, and employees to minimize the effects of delays attributable to supply chain constraints higher cost of labor and component costs, freight and logistics, and limited availability of key components. While our facilities in the US, Mexico, China, and Vietnam are currently operating, and we are following current health guidelines, uncertainty to the possibility of future temporary closures, customer fluctuations in demand and costs, future supply chain disruptions, and other potential factors could significantly impact operations in coming periods. In summary, we continue to grow our pipeline of new sales prospects and continue to increase our customer demand to unprecedented levels for Keytronic. Despite the fact that supply chain disruptions and the pandemic continued to impact our business throughout fiscal year 2022 and remain risks in future periods, We are encouraged by our prospects for growth and new customer programs for fiscal year 2023 and beyond. The overall financial health of the company appears strong, and we believe that we are increasingly well-positioned to win new EMS programs and to continue to profitably expand our business over the longer term. That's it for me, Craig.

Okay, thanks, Brett. Despite facing continuing business challenges throughout the year, including worldwide component shortages, transportation bottlenecks, the global pandemic, and government shutdowns, our annual revenue was $531.8 million, the highest in our corporate history. Our order backlog also reached historic highs. Without the supply chain disruptions, our revenue could have exceeded $700 million. Global logistics problems, the war in Europe, and China-U.S. geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies. These customers increasingly realize that they have become overly dependent upon their China-based contract manufacturers for not only product, but also for design and logistics services. We predicted this dynamic years ago and built Keytronic to be the ideal solution for customers as they move to reduce this extreme risk. As you know, we acquired facilities in Mexico over the last decade at bargain prices while conventional wisdom drove a flight of manufacturing to China. We now have a campus of over 1.1 million square feet in Juarez, most of which is contiguously located in nine facilities acquired over time. Moreover, we maintained a detailed and current analysis of Asian locales over the past seven years. When the China-US relationship became too fraught, we were ready to open our Vietnam facility within only eight months. As we saw many OEMs abdicate their design and documentation capabilities to Asia-based contract manufacturers, we invested in our design team and its CAD tools. As a result, many of our large and medium-sized manufacturing program wins are predicated on Keytronic's deep and broad design services. And, once we have completed a design and ramped it into production, our knowledge of a program's specific design challenges makes that business extremely sticky. We also invested in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, blow, gas assist, multi-shot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. This expertise sets Keytronic apart from our competitors of a similar size. As a result, a customer looking to leave their contract manufacturer finds a one-stop shop in Keytronic. which makes the transition to our facilities much less risky than cobbling together a group of providers, each limited to a portion of the value chain. We understood that our Shanghai plant would remain critical to our success, but in a reimagined form. Our Shanghai plant has added capabilities in management, staff, and systems that allow it to serve Chinese customers directly. As this segment grew, Shanghai has replaced the business that we moved to Vietnam. Meanwhile, our procurement group in Shanghai, which serves the entire corporation, became even more critical as supply issues crippled our competitors without boots on the ground in China. Eight years ago, we acquired three U.S. manufacturing sites that, as anticipated, have benefited greatly from the macro forces driving business back to North America. The fourth quarter of fiscal 2022 saw these U.S.-based facilities setting records for revenue and for backlog of new and longstanding businesses. The combination of these U.S. plants and our expansive design capabilities is proving to be extremely efficient in capturing new business. The result of our strategic foresight in execution is a wave of new business that gets larger every day. While the pandemic and supply shortages have constricted both our top and bottom line performance, obscuring the amplitude and velocity of that wave of new business, the fact that we actually set a corporate record for revenue in the midst of unprecedented supply issues is an indicator of our growing momentum. During fiscal 2022, we successfully expanded our customer base and won new programs involving industrial testing equipment, medical diagnostic products, pharmaceutical water treatment, industrial robots, lighting control, disinfection, food production, energy management systems, outdoor recreation, RFID, industrial connectivity, electric mobility, audio products, GPS devices, utility meters, personal safety devices, innovative internet solutions, and finally, outdoor power equipment. Once fully ramped, this power equipment program alone could contribute approximately $80 million in annual revenue. Moving into fiscal 2023, we still confront significant uncertainty and disruptions to global supply chains for key components. At the same time, the pressures on our customer base to reduce their Asian supply concentration remain very powerful. Demand for onshoring of production to North America continues to grow, With no foreseeable end to tariffs, intensifying political tensions between China and U.S., and increasing Asian production costs and time to market, we believe these macroeconomic factors will continue to drive a significant increase to our business and further validate our strategy. While we don't expect supply chain challenges to be fully resolved in the near term, we see the potential for significant growth in fiscal 2023 and beyond. In closing, I want to emphasize that the execution of our strategy was made possible not only by our investments in plants and equipment, but even more so by the skills, local knowledge, and talents of our people. I want to thank our exceptional employees for their dedication and hard work during this challenging time and our shareholders for their continued support. This concludes the formal portion of our presentation. Brett and I will now be pleased to answer your questions.